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Contaminated Land : Trustees at Risk?

Allen & Overy’s Environmental Law Group unravels the new Contaminated Land Liability Regime which came into force on 1st April 2000 and considers the position of trustees(taken from Isssue No 12 – July 2000)

The new Contaminated Land Liability regime is of particular significance to trustees who own or invest in property as part of a trust fund. Trustees need to be aware that they may, in certain circumstances, be exposed to liability for clean up costs and there may be a consequential breach of trust and personal liability implications.

What is `Contaminated Land`?

Part IIA of the Environmental Protection Act 1990 imposes liability for clean up of land where the land appears to be in such condition, by reason of substances in, on or under it that either:

significant harm is or is likely to be caused; or

pollution of water is being or likely to be caused.

Examples of `significant harm` include diseases in humans and major structural defects to buildings. In addition, to come within the liability regime, the land must have a `pollutant linkage` which is the jargon for a source of pollution, someone or something on the receiving end and a pathway between these. Thus, the fact that a dangerous substance is in the ground does not necessarily mean that the land will be contaminated. The local authority, which is responsible for regulatory action under the new regime, must carry out a risk assessment procedure generally to decide whether the land is contaminated within this statutory definition.

What happens when land is identified as `Contaminated`?

The local authority has a duty to regularly inspect its own area to identify contaminated sites. Once identified, a consultation process takes place (to last for 3 months). Assuming no voluntary action is taken, the authority generally has a duty to serve a remediation notice requiring clean up of the land. Non-compliance with a remediation notice may constitute a criminal offence.

Who is liable?

The contaminated land liability regime imposes liability for clean up (of both land and water), on a person who has `caused or knowingly permitted` (the `Polluter`) the presence of substances in the land which have led to the site being deemed contaminated. If the original Polluter cannot be found (for example due to death or a company being wound up) liability, in some circumstances, may pass to the owner or occupier of the land.

Escaping liability

There are opportunities through statutory guidance associated with the new regime to escape liability altogether. However, the applicable tests for exclusion from liability only apply if there is more than one person identified by the authority as potentially responsible for clean up. Trustees selling property may be able to escape potential liability by providing a buyer with adequate details of the condition of the land or by making a payment to cover clean up costs, though much will depend upon the circumstances prevailing when clean up liability arises. Agreements made on allocating responsibility for clean-up costs will be honoured by the authorities, if undisputed and workable.

Can a trustee face primary liability as a causer or knowing permitter?

Although the terms `causing and knowingly permitting` have been defined very widely by the courts in the past, this wording has not yet been considered in the context of contaminated land liabilities.

Of the two concepts, it is `knowingly permitting` which is the more likely to catch trustees – except in the unlikely event they were to become directly involved in actions resulting in leaks, spills or deposits of potential contaminants. Trustees are vulnerable to being treated as knowing permitters because the concept may apply to permitting the continued presence of substances, as well as to permitting them to be there in the first place. Thus if, as a result perhaps of an environmental audit or report, a trustee becomes aware of the presence of substances later implicated in the need for clean up, he may in certain circumstances, be classified as having been a knowing permitter. The risk of this arising is likely to depend on the degree of a trustee’s active involvement in the management of the land concerned. For example, in the corporate scenario, a trustee may become exposed to liability if he exercises a degree of day to day control akin to being a shadow director of a company which owns or operates on land where the dangerous substances are present, has opportunity to do something about those substances but fails to do so. Mortgage debenture trustees may only be at risk of incurring primary liability during the life of the issue where they have day to day involvement in the land in question. A security trustee advancing funds or issuing notes pursuant to a funding loan agreement is unlikely to be `knowingly permitting` for the purposes of the new liability regime merely by virtue of those decisions.

What about a trustee’s liability as an owner/occupier?

The legislation defines an `owner` as including a trustee. Clearly, if as a trustee you are the owner of contaminated land when clean up is ordered, you may be liable (together with any occupiers of the land) if no one who would otherwise be responsible as a `causer or knowing permitter` can be found. However, liability for owner/occupiers is limited in its scope and, for example, it does not extend to clean up of contaminated water.

The legislation does, however, expressly exclude mortgagees not in possession from the definition of `owner`. Therefore a security trustee holding a beneficial interest in the security granted by the trust deed will not be liable. A security trustee would only become an `owner` for the purposes of the contaminated land legislation if he were to become a mortgagee in possession upon enforcement of the security trust deed.

Does the legislation provide any protection for trustees?

There is little protection in the legislation for trustees. A local authority will assume that a trustee will exercise its powers to make trust funds available for clean up costs or borrow on behalf of the trust to do so. In addition, trustees may incur liability for amounts exceeding the value of the trust fund. In such circumstances, the local authority may clean up the land itself and recover the cost of doing so. The local authority must consider waiving or reducing this cost recovery from the trust (this obligation on the authority is part of the `hardship` provisions in the legislation, aimed at tempering the burden of clean up costs) to the extent that the costs exceed the value of the trust fund. Where a trust is set up with the purpose of avoiding liability for clean up costs, these hardship provisions do not, however, apply.

Position of trustees acquiring and owning property

Where trustees already own land they suspect has substances in it which may give rise to a clean up liability, action to assess the extent of the problem should be considered, consistent with the trustees’ duty to preserve the value of trust assets wherever possible. If they are necessary, steps to deal with contamination should be taken, as a failure to do so may constitute a breach of trust for which the trustees will be personally liable.

On acquiring or investing in property, trustees’ advisors should first establish the nature of the site and ensure that pre-contractual enquiries and searches have been carried out to establish whether there may be a contamination problem. Where land has already been designated as `contaminated`, public registers will be available for inspection giving details of any remediation notices served and subsequent enforcement action. Information may also be sought as part of a conveyancing search of the local authority. In other cases, trustees will need to consider whether to appoint a reputable environmental consultant to make further investigations and conduct a physical survey. Where a problem is identified, trustees may consider obtaining environmental insurance cover.

Trustees should bear in mind their duty when investing in property to consider the suitability of the investment. Speculative or hazardous investments (which may include contaminated land, depending upon the circumstances) should be treated with caution and trustees should refer to the trust deed for guidance.

High Court declaration on the position of a trustee

Eight months before the new regime came into force, the High Court had already considered trustees’ potential liabilities for contaminated land and the Court’s decision recognised that these liabilities may be sizeable.

The trustee in question was the sole trustee of a will. The trust assets included land and fearing potential liability under the forthcoming regime, the trustee sought directions from the Court.

The Court considered (in addition to related points regarding liens) whether the trustee could protect his own liability by securing a lien over the trust fund. A lien confers a right to keep possession of property or assets until a debt owed to the person is paid. Previous case law has held that a trustee has such a lien over the trust fund in respect of proper costs and expenses, which extend to an indemnity against future liabilities, such as those relating to tax. The Court decided that such future liabilities could include those under the new contaminated land regime.

This decision provides some comfort for many trustees.

However, there are many issues which the Court did not deal with, for example, where a trust comes to an end and the proceeds are divided between the beneficiaries, whether a trustee can ensure that some assets are frozen to protect himself against liability. In addition, it may prove difficult to calculate an appropriate amount of money to be protected with a lien to cover future liabilities for clean-up costs.

Some reassurance

The new liability regime does potentially expose trustees (and, of course, the trust fund) to unforeseen costs. However the regime is not as onerous as first appears. Land is not contaminated simply because of the substance present in it – there must be at least a likelihood that harm or pollution will result if no clean up is undertaken. Most sites will not, therefore, qualify. Clean up means doing the minimum necessary to stop the harm or pollution and may not always be as onerous as expected. In addition, the authorities have limited resources. They will tackle the biggest problems first and will seek `voluntary` solutions where possible.

So what is the basic advice?

Trustees should resolve to manage the issues raised by the new liability regime early and not ignore it, taking specialist advice when appropriate.

Allen & Overy in association with LNTV have produced a video giving further information on the contaminated land regime. Copies are available from: